Shrinking Pulp Demand And Rising Tariffs Will Hinder Performance

Key Takeaways

• Structural decline in pulp and paper demand and rising low-cost competition threaten Kadant's core revenues and long-term earnings stability.
  
• Ongoing tariffs, regulation, and compliance costs are compressing margins and raising operating expenses, limiting future profit growth.
  
• High-margin recurring aftermarket sales and a flexible global operation provide revenue and margin stability, positioning Kadant for resilient growth despite economic and tariff uncertainty.

Catalysts

Supplies technologies and engineered systems worldwide.

• The global acceleration towards digitization and paperless processes represents a structural decline in long-term demand for pulp and paper machinery, which is a major revenue engine for Kadant; this stagnating or shrinking addressable market directly constrains future organic revenue growth and puts long-term earnings at risk.
  
• Intensifying deglobalization and protectionist measures, as evidenced by ongoing and unpredictable tariffs, are driving up material and manufacturing costs-especially steel and cross-border components-and causing significant delays and uncertainty in capital equipment orders, which erode both revenues and margins over the long term.
  
• Despite management's claims of adaptability, Kadant remains heavily dependent on the pulp and paper sector, meaning secular headwinds for that industry-including competition from low-impact materials and shifting capital allocation away from traditional pulp and paper-leave the company exposed to cyclical and secular revenue contraction and pressure on earnings stability.
  
• Increased compliance, R&D, and cost mitigation efforts needed to address evolving tariffs and environmental regulations add a heavy, recurring operating expense burden, pressuring net margins over time and requiring sustained investment just to remain compliant, further limiting profit growth.
  
• Rising competition from lower-cost global machinery providers, including Asian manufacturers, accelerates price compression and increases the risk of market share losses for Kadant, compounding the impact of shrinking traditional markets and threatening the company's long-term EBITDA and earnings power.

Kadant Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kadant compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kadant's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.6% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach $124.1 million (and earnings per share of $10.49) by about July 2028, up from $111.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, down from 36.3x today. This future PE is greater than the current PE for the US Machinery industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Kadant Future Earnings Per Share Growth

Risks

• Despite tariff-related uncertainty and softness in capital equipment, Kadant's recurring aftermarket parts and consumables revenue reached record levels, making up approximately 75% of quarterly sales; this high proportion of recurring business supports revenue and margin stability through economic cycles and trade disruptions.
  
• The company demonstrated strong gross margin resilience, reaching its highest level since 2017, largely due to an increasing mix of high-margin aftermarket parts, suggesting robust underwriting of net margins even in periods with weak capital sales.
  
• Kadant's decentralized operating structure and global manufacturing footprint allow it to quickly adapt to shifting trade barriers and supply chain challenges, reducing long-term risk to both revenue and earnings even amid ongoing tariff volatility.
  
• Management indicates that delayed capital orders are not being cancelled but merely pushed into later periods, with a large pipeline of projects under discussion, positioning Kadant for a revenue and earnings rebound as uncertainty abates and investment cycles normalize.
  
• The large and aging installed equipment base at customer sites is driving increased spare part and consumables sales, and management expects a catch-up in capital investment over the next several years as customers inevitably replace or upgrade equipment, supporting long-term top line growth and cash flow resilience.

Valuation

• The assumed bearish price target for Kadant is $275.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kadant's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $380.0, and the most bearish reporting a price target of just $275.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $124.1 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $342.55, the bearish analyst price target of $275.0 is 24.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.